The Personal Income and Consumption Index is a report from the United States that includes both personal income and consumption expenditures from all sources. This is a monthly figure, which always refers to the two previous months in which the Bureau of Economic Analysis of the Department of Commerce discloses the report.
In this case, the personal income and savings data, which is also covered by the report, provide economists and market analysts an insight into future spending (consumption) trends in the economy of the United States.
Relevance of the Indicator
The largest component of total income is the one for Wages and Salaries, a figure that can be estimated using payrolls and earnings data in the employment report. Moreover, there are many categories of income: rental income, government subsidy payments, interest income and dividends. The Personal Income and Consumption Index is a strong indicator of future consumer demand, but it is not perfect. In fact, recessions tend to occur when consumers stop spending, which in turn drives the growth of personal income. Looking solely at income, the analist may miss a turning point when consumers stop spending.
This report also includes a section dedicated to personal consumption expenditures, also known as PCE (Personal Consumption Expenditures). The PCE is comprised of three categories: durable goods, nondurable goods and services. The retail sales report provides a good reading of the consumption of durable and nondurable goods, while the service purchases tend to grow at a fairly constant rate, thus making this a relatively predictable indicator, placing it well below Retail Sales indicator in terms of market importance.
Effects of the indicator in the market
Despite its small impact on the market because of its predictability, as commented in the previous section, this indicator has some impact in certain financial markets like the stock market, the bond market, and the Forex market, as will be explained below.
When the index is rising, investors can anticipate that the stock market will rise due to increased corporate profits that come with increased consumption. The revaluation of the equity markets and economic growth would translate into a stronger currency (Forex). Consequently, many investors will be attracted to invest in an expanding economy, so the expectations of the economy will improve because there will be more confident. At the same time, this creates new businesses, and new jobs, the personal income will grow, the consumption tends to increase, etc. Given this climate of economic prosperity, global investors have to buy the domestic currency to purchase shares of the stock market of the country or to invest in companies directly, which causes revaluation of the currency.
When the index grows, the counterpart is a declining bond market for fear of increased inflation due to rising personal income and consumption. It is easy to foresee that the economic growth will drive an increase in interest rates, and as a result, a depreciation of bond prices.
More information on fundamental indicators and their influence on Forex and other financial markets in this article: Fundamental Analysis in Forex